What is a Trade Tariff?

One significant aspect of international foreign policy is the levying or lifting of trade tariffs. A trade tariff is a tax or duty which is placed on goods crossing political borders. Import tariffs are the most common, and involve a tax being assessed on products coming in from another county. Export tariffs, which are less common, are duties on goods being shipped out of the country.

Originally, the primary purpose of a trade tariff was to create a source of national revenue. European and Asian trade routes crossed many borders, and the levying of a tariff on the merchants seemed an effective, relatively effortless, source of income. As manufacturing increased, however, the reason for tariffs changed. Most tariffs are now based on protectionism, an economic policy that seeks to protect one nation’s economy by restricting trade from other countries. This frequently occurs when the importing nation is able to produce a product at a lower cost, possibly because of a lower wage scale.

A trade tariff may also be levied by one nation against another in response to trade restrictions enacted against it If these retaliatory tariffs escalate, the situation is referred to as a tariff war, or trade war. Tariffs have also been used to try to correct a trade imbalance between two countries. A trade deficit exists when imports exceed exports. A trade surplus exists when exports exceed imports.

One of the challenges of taxing imports is achieving international uniformity in assessing tariffs. In 1947, a study group was commissioned to seek a solution to this issue, and that committee eventually became the World Customs Organization. The group has expanded from the original 13 European nations to over 170 member countries. They have set trade tariff standards and established an identification code for goods, called the International Harmonized Commodity Description and Coding System (HS). This group has simplified customs worldwide, and now processes 98% of world trade.

One type of trade tariff, the ad valorem tariff, exacts a set percentage of the value of the goods. This method can cause some problems, however, since values can fluctuate frequently. A specific tariff charges a set monetary amount based on the type of product being shipped. A prohibitive tariff is a trade tariff that is set so high the product is no longer affordable. An environmental, or green, tariff is a relatively new creation, and is used to tax items imported from countries with lower environmental standards.

As international trade has become more prevalent, the number and size of tariffs has diminished. Trade blocs, customs unions, and free trade zones have become much more common. A trade bloc is a group of nations that agree to lower or eliminate tariffs between member nations, and to charge a uniform trade tariff to nations outside the bloc. Customs unions are formed by countries that set common external tariffs and agree to a formula for sharing the tariffs collected. A free trade zone is a geographic region that has agreed to eliminate trade tariffs and restrictions between the member nations.

There is a great deal of debate about the advantages and disadvantages of abolishing all tariffs and adopting worldwide free trade. While such a move might benefit some countries, other small or developing nations could be devastated economically. Most countries seem to prefer reserving the right to control imports, while engaging in smaller trade blocs in a cooperative manner.